1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 26, 1998.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______
Commission file number 1-8703
WESTERN DIGITAL CORPORATION
-----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2647125
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8105 Irvine Center Drive
Irvine, California 92618
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (949) 932-5000
REGISTRANT'S WEB SITE: HTTP://WWW.WESTERNDIGITAL.COM
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of Common Stock, as of January 23, 1999 is
89,266,901.
2
WESTERN DIGITAL CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three-Month Periods
Ended December 27, 1997 and December 26, 1998.................. 3
Consolidated Statements of Operations - Six-Month Periods
Ended December 27, 1997 and December 26, 1998.................. 4
Consolidated Balance Sheets - June 27, 1998 and
December 26, 1998.............................................. 5
Consolidated Statements of Cash Flows - Six-Month Periods
Ended December 27, 1997 and December 26, 1998.................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 4. Submission of Matters to Vote of Security Holders.............. 21
Item 6. Exhibits and Reports on Form 8-K............................... 22
Signatures............................................................... 23
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTH PERIOD ENDED
---------------------------------
DEC. 27, DEC. 26,
1997 1998
----------- -----------
Revenues, net .................................... $ 969,564 $ 738,590
Costs and expenses:
Cost of revenues ............................ 1,025,112 719,423
Research and development .................... 44,472 50,363
Selling, general and administrative ......... 47,178 47,819
----------- -----------
Total costs and expenses ................ 1,116,762 817,605
----------- -----------
Operating loss ................................... (147,198) (79,015)
Net interest income (expense) (Note 3) ........... 2,015 (3,238)
----------- -----------
Loss before income taxes ......................... (145,183) (82,253)
Provision for income taxes ....................... -- --
----------- -----------
Net loss ......................................... $ (145,183) $ (82,253)
=========== ===========
Loss per common share (Note 2):
Basic ................................... $ (1.66) $ (.93)
=========== ===========
Diluted ................................. $ (1.66) $ (.93)
=========== ===========
Common shares used in computing per share amounts:
Basic ................................... 87,319 88,888
=========== ===========
Diluted ................................. 87,319 88,888
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX-MONTH PERIOD ENDED
---------------------------------
DEC. 27, DEC. 26,
1997 1998
----------- -----------
Revenues, net .................................... $ 2,059,728 $ 1,389,448
Costs and expenses:
Cost of revenues ............................ 1,954,217 1,453,033
Research and development .................... 86,774 102,284
Selling, general and administrative ......... 93,872 105,151
----------- -----------
Total costs and expenses ................ 2,134,863 1,660,468
----------- -----------
Operating loss ................................... (75,135) (271,020)
Net interest income (expense) (Note 3) ........... 4,603 (5,891)
----------- -----------
Loss before income taxes ......................... (70,532) (276,911)
Provision for income taxes ....................... 11,944 --
----------- -----------
Net loss ......................................... $ (82,476) $ (276,911)
=========== ===========
Loss per common share (Note 2):
Basic ................................... $ (.95) $ (3.12)
=========== ===========
Diluted ................................. $ (.95) $ (3.12)
=========== ===========
Common shares used in computing per share amounts:
Basic ................................... 87,030 88,717
=========== ===========
Diluted ................................. 87,030 88,717
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
5
WESTERN DIGITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 27, DEC. 26,
1998 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 459,830 $ 353,660
Accounts receivable, less allowance for doubtful
accounts of $15,926 at June 27, 1998 and
$17,926 at Dec. 26, 1998 ................... 369,013 371,960
Inventories (Note 3) .......................... 186,516 160,974
Prepaid expenses ............................... 36,763 24,975
----------- -----------
Total current assets ....................... 1,052,122 911,569
Property and equipment at cost, net ................. 346,987 342,779
Intangible and other assets, net .................... 43,579 42,174
----------- -----------
Total assets ............................... $ 1,442,688 $ 1,296,522
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 330,130 $ 386,004
Accrued compensation ........................... 23,697 34,218
Accrued warranty ............................... 47,135 89,441
Accrued expenses ............................... 187,617 191,112
----------- -----------
Total current liabilities .................. 588,579 700,775
Long-term debt ...................................... 519,188 531,505
Deferred income taxes ............................... 17,163 16,711
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value;
Authorized: 5,000 shares
Outstanding: None ......................... -- --
Common stock, $.01 par value;
Authorized: 225,000 shares
Outstanding: 101,332 shares at June 27,
1998 and at December 26, 1998 .............. 1,013 1,013
Additional paid-in capital ..................... 326,244 326,726
Retained earnings (accumulated deficit) ........ 197,849 (79,062)
Treasury stock-common stock at cost;
13,039 shares at June 27, 1998 and 12,222
shares at Dec. 26, 1998 (Note 4) ........... (207,348) (201,146)
----------- -----------
Total shareholders' equity ................. 317,758 47,531
----------- -----------
Total liabilities and shareholders' equity . $ 1,442,688 $ 1,296,522
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
6
WESTERN DIGITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX-MONTH PERIOD ENDED
-------------------------------
DEC. 27, DEC. 26,
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (82,476) $ (276,911)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization ........................... 47,385 67,287
Interest accrued on convertible debentures .............. -- 12,317
Changes in assets and liabilities:
Accounts receivable ................................... 65,184 (2,947)
Inventories ........................................... (60,930) 25,542
Prepaid expenses ...................................... 995 11,788
Accounts payable ...................................... (23,469) 55,874
Accrued compensation, accrued warranty and
accrued expenses .................................... 65,798 56,322
Other assets .......................................... 406 2,848
Deferred income taxes ................................. 1,112 (452)
----------- -----------
Net cash provided by (used for ) operating
activities ....................................... 14,005 (48,332)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ................................. (111,791) (60,097)
Decrease (increase) in other assets ....................... 5,500 (1,500)
----------- -----------
Net cash used for investing activities ............. (106,291) (61,597)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash used to repay bank debt (Note 6) ..................... -- (50,000)
Proceeds from issuance of bank debt (Note 6) .............. -- 50,000
Exercise of stock options, including tax benefit in 1998 .. 8,431 3,611
Proceeds from ESPP shares issued .......................... 7,443 3,073
Common stock repurchase program ........................... (12,525) --
Costs relating to credit facility ......................... -- (2,925)
----------- -----------
Net cash provided by financing activities .......... 3,349 3,759
----------- -----------
Net decrease in cash and cash equivalents ................. (88,937) (106,170)
Cash and cash equivalents, beginning of period ............ 208,276 459,830
----------- -----------
Cash and cash equivalents, end of period .................. $ 119,339 $ 353,660
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ................... $ 12,308 $ 3,317
Cash paid during the period for interest ....................... -- 2,136
The accompanying notes are an integral part of these consolidated financial
statements.
6
7
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accounting policies followed by the Company are set forth in Note 1
of Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K as of and for the year ended June 27, 1998.
2. The following table illustrates the computation of basic and diluted
loss per share under the provisions of SFAS No. 128 (in thousands,
except for per share amounts):
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
---------------------------------- --------------------------------
DEC. 27, DEC. 26, DEC. 27, DEC. 26,
1997 1998 1997 1998
------------ ------------ ------------ ------------
Numerator:
Numerator for basic and diluted
loss per share--net loss ....... $ (145,183) $ (82,253) $ (82,476) $ (276,911)
============ ============ ============ ============
Denominator:
Denominator for basic loss per
share--weighted average number
of common shares outstanding
during the period .............. 87,319 88,888 87,030 88,717
Incremental common shares
attributable to exercise of
outstanding options, ESPP
contributions and convertible
debentures ..................... -- -- -- --
------------ ------------ ------------ ------------
Denominator for diluted loss
per share ...................... 87,319 88,888 87,030 88,717
============ ============ ============ ============
Basic loss per share ............. $ (1.66) $ (.93) $ (.95) $ (3.12)
============ ============ ============ ============
Diluted loss per share ........... $ (1.66) $ (.93) $ (.95) $ (3.12)
============ ============ ============ ============
For the three and six-month periods ended December 27, 1997 and December
26, 1998, 11.1 and 17.4 million shares, respectively, relating to the
possible exercise of outstanding stock options were not included in the
computation of diluted loss per share. For the three and six-month
periods ended December 26, 1998, an additional 19.4 million shares
issuable upon conversion of the convertible debentures were excluded
from the computation of diluted loss per share. The effects of these
items were not included in the computation of diluted loss per share as
their effect would have been anti-dilutive.
On September 10, 1998, the Company's board of directors authorized and
declared a dividend distribution of one Right for each share of common
stock of the Company outstanding at the close of business on November
30, 1998. In addition, the Company's board of directors authorized the
issuance of one Right for each share of common stock of the Company
issued from the Record Date until certain dates as specified in the
Company's Rights Agreement dated as of October 15, 1998, pursuant to
which the Company's existing shareholders rights plan will be replaced
by a successor ten year plan. The Rights issued become exercisable for
common stock at a discount from market value upon certain events related
to a change in control.
7
8
3. Supplemental Financial Statement Data (in thousands)
JUNE 27, DEC. 26,
1998 1998
-------- --------
Inventories
Finished goods ..................... $126,363 $ 92,660
Work in process .................... 28,287 32,069
Raw materials and component parts... 31,866 36,245
-------- --------
$186,516 $160,974
======== ========
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
-------------------------- --------------------------
DEC. 27, DEC. 26, DEC. 27, DEC. 26,
1997 1998 1997 1998
-------- -------- -------- --------
Net Interest Income (Expense)
Interest income ................ $ 2,015 $ 4,824 $ 4,603 $ 10,115
Interest expense ............... -- (8,062) -- (16,006)
-------- -------- -------- --------
Net interest income (expense)... $ 2,015 $ (3,238) $ 4,603 $ (5,891)
======== ======== ======== ========
4. During the six months ended December 26, 1998, the Company distributed
325,000 and 493,000 shares of its common stock in connection with the
Employee Stock Purchase Plan ("ESPP") and common stock option exercises,
respectively, for $6.7 million.
5. In the opinion of management, all adjustments necessary to fairly state the
consolidated financial statements have been made. All such adjustments are
of a normal recurring nature. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K as of and for
the year ended June 27, 1998.
6. In November 1998, the Company replaced its then existing secured revolving
credit and term loan facility with a new facility ("Senior Bank Facility").
The Senior Bank Facility provides the Company with a $150 million revolving
credit line and a $50 million term loan, both of which expire in November
2001. The term loan requires quarterly payments of $2.5 million beginning in
September 1999 with the remaining balance due in November 2001. The Senior
Bank Facility is secured by substantially all of the Company's assets. The
availability under the revolving portion of the Senior Bank Facility is
dependent on the borrowing base. At the option of the Company, borrowings
bear interest at either LIBOR or a base rate plus a margin determined by the
borrowing base, with option periods of one to three months. The Senior Bank
Facility requires the Company to maintain certain amounts of net equity and
prohibits the payment of dividends. The $50 million term loan outstanding as
of September 26, 1998 under the previous credit facility was repaid and
replaced with the $50 million term loan under the Senior Bank Facility.
8
9
7. The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by
the Company in calendar 1988 and 1989 were defective and caused damages to
Amstrad of $186.0 million in out-of-pocket expenses, lost profits, injury to
Amstrad's reputation and loss of goodwill. The Company filed a counterclaim
for $3.0 million in actual damages in addition to exemplary damages in an
unspecified amount. Trial of this case commenced October 5, 1998, and on
January 5, 1999, with the jury deadlocked on the issue of liability, a
mistrial was declared. Retrial of the case is set for March 1, 1999. The
Company believes that it has meritorious defenses to Amstrad's claims and is
vigorously defending itself against the Amstrad claims and pressing its
claims against Amstrad in this action. Although the Company believes that
the final disposition of this matter will not have an adverse effect on the
Company's financial condition or operating results, if Amstrad were to
prevail on its claims, a judgment for a material amount could be awarded
against the Company.
Between December 12, 1997 and February 24, 1998, eight class action suits
were filed against the Company and certain of its officers and directors.
The complaints alleged that the Company issued false and misleading
statements from July 25, 1996, through December 2, 1997 concerning the
outlook for the Company's operations and earnings and that the Company
issued false and misleading financial statements in fiscal years 1996 and
1997 by improperly deferring the write-down of obsolete inventory. The
Company filed a motion to dismiss the amended consolidated complaint which
was granted by the Court with prejudice, and on August 21, 1998, the case
was dismissed. No appeal of the case was filed.
8. On January 19, 1999, the Company initiated a restructuring program whereby
it is combining its Personal Storage Division and Enterprise Storage Group
into a single hard drive operating unit. The new Drive Products Division
("DPD") will combine design, manufacturing, materials, business and product
marketing resources to address both the desktop and enterprise markets. The
Company expects the move to result in efficiencies in every operating area
from marketing, research and development to manufacturing and procurement.
As a result of streamlining the two operations, the Tuas, Singapore facility
will be closed and held for sale, and production of WD Enterprise drives
will be transferred to the Company's nearby facility in Chai-Chee,
Singapore. The restructuring program is expected to reduce worldwide
employee headcount by approximately 750 employees. Write-offs of fixed
assets and employee severance and relocation costs relating to the
restructuring program are expected to result in a charge of approximately
$45 million to the Company's results of operations for the quarter ending
March 27, 1999. Of this amount, approximately $10 million is expected to
utilize cash, primarily during the third quarter.
9. On February 1, 1999, the Company acquired Crag Technologies, a San
Jose-based startup company that has focused on developing storage solutions
for NT servers since its inception, at a cost of approximately $12 million.
The purchase price includes Western Digital common stock and the assumption
of certain liabilities. The Company plans to continue development efforts
and expects to ship its first products developed by the new unit within
9 - 12 months. The acquisition is expected to result in a one-time charge
for in-process research and development of approximately $12 million to the
Company's results of operations for the quarter ending March 27, 1999.
9
10
This Quarterly Report on Form 10-Q contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 as amended, that involve risks and
uncertainties. Forward-looking statements can typically be identified by the use
of forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast,"
and the like. These statements appear in a number of places in this Report and
include statements regarding the intentions, plans, strategies, beliefs or
current expectations of the Company, its directors or its officers, with respect
to, among other things:
o the financial prospects of the Company;
o the Company's financing plans;
o trends affecting the Company's financial condition or operating
results;
o the Company's strategies for growth, operations, and product
development and commercialization; and
o conditions or trends in or factors affecting the computer or hard
drive industry
Forward-looking statements are based on current expectations, do not
guarantee future performance and involve risks and uncertainties that could
cause actual results to differ materially from those anticipated. The
information contained in "Certain Factors Affecting Western Digital Corporation
and/or the Disk Drive Industry" of this Report as well as in the Company's other
periodic reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission, identifies important factors that could cause such
differences.
Unless otherwise indicated, references herein to specific years and quarters are
to the Company's fiscal years and fiscal quarters. The three-month period ended
December 26, 1998 is referred to herein as the second quarter of 1999 or the
current quarter.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On January 19, 1999, the Company initiated a restructuring program whereby it is
combining its Personal Storage Division and Enterprise Storage Group into a
single hard drive operating unit. The new Drive Products Division ("DPD") will
combine design, manufacturing, materials, business and product marketing
resources to address both the desktop and enterprise markets. The Company
expects the move to result in efficiencies in every operating area from
marketing, research and development to manufacturing and procurement. As a
result of streamlining the two operations, the Tuas, Singapore facility will be
closed and held for sale, and production of WD Enterprise drives will be
transferred to the Company's nearby facility in Chai-Chee, Singapore. The
restructuring program is expected to reduce worldwide employee headcount by
approximately 750 employees. Write-offs of fixed assets and employee severance
and relocation costs relating to the restructuring program are expected to
result in a charge of approximately $45 million to the Company's results of
operations for the quarter ended March 27, 1999. Of this amount, approximately
$10 million is expected to utilize cash, primarily in the third quarter.
On February 1, 1999, the Company acquired Crag Technologies, a San Jose-based
startup company that has focused on developing storage solutions for NT servers
since its inception, at a cost of approximately $12 million. The purchase price
includes Western Digital common stock and the assumption of certain liabilities.
The Company plans to continue development efforts and expects to ship its first
products developed by the new unit within 9 - 12 months. The acquisition is
expected to result in a one-time charge for in-process research and development
of approximately $12 million to the Company's results of operations for the
quarter ending March 27, 1999.
10
11
RESULTS OF OPERATIONS
Consolidated revenues were $738.6 million in the second quarter of 1999, a
decrease of 24% from the second quarter of the prior year and an increase of 13%
from the immediately preceding quarter. Consolidated revenues were $1.4 billion
in the first six months of 1999, down 33% from the corresponding period of 1998.
The lower revenues in the three and six-month periods ended December 26, 1998
resulted from 7% and 17% declines in hard drive unit shipments from the
comparable periods of 1998, respectively, combined with reductions in the
average selling prices ("ASP") of hard drive products due to an intensely
competitive hard drive business environment. The higher revenues in the current
quarter compared to the immediately preceding quarter were due to a 17% increase
in hard drive unit shipments, partially offset by slightly lower ASPs.
Consolidated gross profit margin increased 8 and 15 percentage points from the
second quarter of 1998 and the immediately preceding quarter, respectively. The
gross profit margin in the second quarter of 1998 and the first quarter of 1999
included special charges of $148 million and $77 million, respectively. The $148
million special charge recorded in the second quarter of 1998 included estimated
component cancellation charges, inventory and other asset write-downs, costs
incurred on terminated mobile PC engineering programs, and other estimated
incremental costs related to the production, sale, and accelerated wind-down of
thin film products and ramp-up of products with magneto-resistive ("MR") heads.
The $77 million special charge recorded in the first quarter of 1999 was made to
increase warranty reserves associated with the Company's last generation of thin
film desktop products because experience indicated a slightly higher return
rate, higher cost of repair and longer duration of returns within the warranty
period for these products.
Excluding the special charges, the gross profit margin in the second quarter of
1999 was 3% as compared to 10% in the corresponding period of the prior year and
- -1% in the immediately preceding quarter. The 7 percentage point decline in
gross profit margin from the second quarter of 1998 was primarily related to
lower ASPs for the Company's products. The sequential improvement in gross
profit margin was due to an improved pricing environment, as demand for desktop
hard drives increased, and a reduction in desktop unit costs as a result of
improved time-to-market performance for the Company's latest generation of
MR-based desktop storage products. Excluding the aforementioned special charges,
consolidated gross profit margin for the first six months of 1999 was 1% as
compared to 12% in the corresponding period of the prior year. The decline in
gross profit margin was primarily related to lower ASPs for the Company's
products.
Research and development ("R&D") expense for the current quarter was $50.4
million, an increase of $5.9 million from the second quarter of the prior year
and a decrease of $1.6 million from the immediately preceding quarter. R&D
expense for the first six months of 1999 was $102.3 million, an increase of
$15.5 million from the same period of 1998. The increase in absolute dollars
spent from the corresponding periods of the prior year were consistent with the
Company's decision to develop a full line of enterprise storage products and to
focus on regaining time-to-market leadership with its desktop storage products.
Selling, general and administrative ("SG&A") expense for the second quarter of
1999 was $47.8 million, an increase of $.6 million over the corresponding
quarter of the prior year and a decrease of $9.5 million from the immediately
preceding quarter. The sequential decrease related primarily to the $7.5 million
of foreign currency-related special charges recorded in the first quarter of
1999 for losses on terminated hedging contracts on the Malaysian Ringgit
currency due to the Malaysian government's imposition of currency controls. SG&A
expense was $105.2 million for the first six months of 1999, up $11.3 million
the same period of 1998. The increase was primarily the result of the
aforementioned foreign currency-related special charges and higher depreciation
expense associated with the Company's recently implemented computer information
systems.
Net interest expense for the current quarter was $3.2 million, compared with net
interest income of $2.0 million in the corresponding quarter of 1998 and net
interest expense of $2.7 million in the immediately preceding quarter. Net
interest expense was $5.9 million for the first six months of 1999 as compared
to net interest income of $4.6 million in the corresponding period of 1998. The
changes from the comparable periods of 1998 were primarily attributable to
interest expense incurred on the Company's $50 million term loan, which is part
of the Company's Senior Bank Facility, and accrual of original issue discount on
the Company's convertible subordinated debentures due 2018 ("Debentures"). No
debt was outstanding during the first six months of 1998. Partially offsetting
this increase was incremental interest income earned on the cash and cash
equivalents balance in the current periods, which was higher than historical
levels due to the proceeds from the
11
12
sale of the Debentures and borrowings under the Senior Bank Facility. The
increase in net interest expense from the immediately preceding quarter was
primarily the result of lower average cash and cash equivalent balances in the
current quarter.
The provision for income taxes recorded in the first six months of 1998 resulted
from earnings from certain foreign subsidiaries. The Company did not provide
income tax benefit on the loss incurred in the first half of 1999 as it is not
more likely than not that the resulting deferred tax assets could be realized.
LIQUIDITY AND CAPITAL RESOURCES
At December 26, 1998, the Company had $353.7 million of cash and cash
equivalents as compared with $459.8 million at June 27, 1998. Net cash used for
operating activities was $48.3 million during the first six months of 1999 as
compared to net cash provided by operating activities of $14.0 million in the
corresponding period of the prior year. Cash flows resulting from lower
inventories and higher current liabilities were more than offset by the net loss
(net of non-cash charges). Another significant use of cash during the first six
months of 1999 was capital expenditures of $60.1 million, incurred primarily to
upgrade the Company's media production capability and for normal replacement of
existing assets.
In November 1998, the Company replaced its then existing secured revolving
credit and term loan facility with a new facility ("Senior Bank Facility"). The
Senior Bank Facility provides the Company with a $150 million revolving credit
line and a $50 million term loan, both of which expire in November 2001. The
term loan requires quarterly payments of $2.5 million beginning in September
1999 with the remaining balance due in November 2001. The Senior Bank Facility
is secured by substantially all of the Company's assets. The availability under
the revolving portion of the Senior Bank Facility is dependent on the borrowing
base. At the option of the Company, borrowings bear interest at either LIBOR or
a base rate plus a margin determined by the borrowing base, with option periods
of one to three months. The Senior Bank Facility requires the Company to
maintain certain amounts of net equity and prohibits the payment of dividends.
The Company owns approximately 34 acres of land in Irvine, California upon
which, when business conditions are more favorable, it intends to obtain lease
financing to construct new corporate headquarters. The new headquarters facility
is not expected to materially increase the Company's occupancy costs. However,
there can be no assurance that the Company will be successful in entering into a
leasing arrangement for this property on terms that will be satisfactory to the
Company, and other alternatives available to the Company upon expiration of its
current headquarters lease in June 2000 could be more costly.
The Company believes that its current cash balances combined with cash flow from
operations and the Senior Bank Facility will be sufficient to meet its working
capital needs for the foreseeable future. However, the Company's ability to
sustain its working capital position is dependent upon a number of factors that
are discussed below under the heading "Certain Factors Affecting Western Digital
Corporation and/or the Disk Drive Industry."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual and interim financial statements. SFAS 131
establishes standards for reporting financial and descriptive information about
an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. For the three and six-month periods ended December 26, 1998 and
all prior periods presented, the Company has not possessed any of the components
of other comprehensive income. Application of the Statements' requirements is
not expected to have a material impact on the Company's consolidated financial
position, results of operations or loss per share as currently reported.
12
13
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Application of this accounting standard is
not expected to have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
YEAR 2000
The Company has considered the impact of Year 2000 issues on its products,
computer systems and applications and has developed a remediation process.
Remediation activities are underway, and the Company expects readiness and
testing to be completed by June 1999 and full integration testing completed by
July, 1999. Expenditures related to the Year 2000 project, which include normal
replacement of existing capital assets, were approximately $5.0 million in 1998,
$2.5 million in the first half of 1999 and are expected to amount to
approximately $35.0 million in total. For an additional discussion of Year 2000
issues, see Certain Risk Factors Affecting Western Digital Corporation and/or
the Hard Drive Industry -- Year 2000 Issue.
CERTAIN FACTORS AFFECTING WESTERN DIGITAL CORPORATION AND/OR THE DISK DRIVE
INDUSTRY
Highly Competitive Industry
The price of hard drives decreases over time due to increases in supply, cost
reductions and technological advances. This price erosion accelerates when one
or more competitors reduce prices to liquidate excess inventories or attempt to
gain market share. In addition, hard drive customers consistently demand greater
storage capacity and higher performance, which requires us to continually
develop products that incorporate new technology on a timely and cost-effective
basis. This in turn reduces the volume and profitability of sales of existing
products and increases the risk of inventory obsolescence.
The desktop portion of the hard drive industry is intensely competitive and
characterized by periods of oversupply and severe price erosion. During 1996 and
1997, we significantly increased our share of the desktop market, but most of
these gains were lost during 1998 for the following reasons:
o our decision to reduce production in the face of industry
oversupply and rapidly declining prices
o our late transition to magneto-resistive ("MR") head
technology
o manufacturing and performance issues encountered as we
continued to produce thin film head products at higher storage
capacities than our competitors.
The enterprise portion of the hard drive industry is more concentrated, with
Seagate Technology having the largest market share. Performance, quality, and
reliability are even more important to the users of high-end products than to
users in the desktop market. However, this market has recently become much more
price competitive, and we expect this trend to continue.
Data Storage Industry Risks
Our hard drives are components in computer systems. Demand for our hard drives
depends on the demand for computer systems manufactured by our customers and on
storage upgrades to existing systems. The demand for computer systems has been
volatile in the past and often has had an exaggerated effect on the demand for
hard drives in any given period. In calendar 1998, for example, the growth in
desktop PC sales slowed significantly, causing a sharp decline in demand for
hard drives. When the supply of hard drives exceeds demand, as it did in
calendar 1998, the oversupply of available products causes higher than
anticipated inventory levels and intense price competition. We expect that this
situation will occur again in the future.
13
14
Rapid Technological Change and Product Development
The hard drive industry is characterized by rapid technological changes,
particularly in recording head technology. MR heads, which enable higher
capacity per hard drive than conventional heads, became the leading recording
head technology during early 1998. Several of our major competitors incorporated
MR head technology into their products much earlier than we did and achieved
time-to-market leadership with some MR products. We completed our transition of
desktop hard drives to MR head technology by the end of 1998, and we are now
beginning our transition to giant magneto-resistive ("GMR") heads, the next
recording head technology. However, if we fail to:
o regain time-to-market leadership with products
incorporating MR and then GMR head technology
o qualify these products with key customers on a timely
basis
o produce these products in sufficient volume
then our market share could continue to fall and harm our operating results. Our
transition to GMR recording technology is our next important challenge. We have
just begun manufacturing our first hard drives with GMR technology, and
therefore it is too early for us to know how successful we will be in making
this technology transition compared to our competitors.
If we are to succeed in the enterprise hard drive portion of the market, we must
successfully develop and timely introduce new products, and we must increase the
number of customers for our products. As we expand our product line, one of the
many challenges we face is staffing. Hiring additional qualified engineers is
difficult because competition world-wide for skilled hard drive development
engineers is intense. We also may encounter development delays or quality issues
which may adversely affect the introduction of new products. If we experience
any of these setbacks, we may miss crucial delivery time windows on these new
enterprise products, which would likely harm our operating results.
Due to short product life cycles, we must regularly engage in new product
qualification with our customers. This process is typically complicated and
lengthy, and any failure or delay in qualifying new products with a customer can
result in our losing sales to that customer until the next generation of
products is introduced. Most of our customers qualify only a few vendors for
each product. This issue is particularly acute in the enterprise portion of the
market because the product life cycles for enterprise hard drives are longer
than those for desktop drives.
With the continued pressures to shorten the time required to introduce new
products, we must reduce the time to achieve acceptable manufacturing yields and
costs. Our inability to do so has harmed our operating results in the past and
could do so again in the future.
Advances in magnetic, optical or other data storage technologies could result in
competitive products that have better performance or lower cost per unit of
capacity than our products. Some of our competitors are developing optically
assisted recording products, but we have decided not to pursue this technology
at this time. If optically assisted recording products prove to be superior in
performance or cost per unit of capacity, we could be at a competitive
disadvantage to the companies offering those products.
Component Supply and Technology License Agreement with International Business
Machines Corporation ("IBM")
In June, 1998, we entered into a broad-based hard drive component supply and
technology licensing agreement with IBM. This agreement enables us to
incorporate IBM's technology, designs and hard drive components into our desktop
products. Implementation of this agreement presents several significant
challenges:
14
15
o most important, the need to adapt IBM's product designs
and manufacturing processes so that the hard drives with
IBM technology can be manufactured by us at a low enough
cost to compete in the high-volume desktop market
o our engineers must integrate IBM technology into our
products while continuing to conduct our own research and
development activities
IBM will be our sole supplier of the head components for desktop hard drives
manufactured under this agreement. Our business and operating results would be
harmed if those heads fail to satisfy our quality requirements or if IBM is
unable to meet our volume or delivery requirements. While we believe that IBM's
current and planned manufacturing capacity will meet our projected requirements,
growth of our sales of hard drives with IBM technology is dependent upon IBM
continuing to devote substantial financial resources to support the manufacture
of the components.
We entered into the agreement expecting that IBM will continue to lead the hard
drive industry in storage capacity and performance. We also believed that we
could leverage that leadership into our own time-to-market and time-to-volume
advantage in the desktop portion of the market. If IBM does not maintain that
leadership, we may not realize the benefits we had anticipated.
Although the agreement contains restrictions on IBM's ability to license its
technology to other companies, it is not exclusive, and competitors may have
access to both the products and the underlying technology. The agreement
continues until 2001, subject to several conditions including our commitment to
purchase specified quantities of components from IBM.
Customer Concentration and Changing Customer Models
High volume customers for hard drives are concentrated among a small number of
computer manufacturers, distributors and retailers. We believe our relationships
with key customers are generally good. However, if we were to lose one or more
accounts, it could harm our operating results. Our customers are generally not
obligated to purchase any minimum volume and are generally able to terminate
their relationship with us at will. We have experienced reductions in our
business, with resulting loss of revenue, with some customers largely as a
result of delays and difficulties encountered in our transition to MR head
technology. Future changes in purchase volume or customer relationships
resulting in decreased demand for our hard drives, whether by loss of or delays
in orders, could harm our operating results.
The bottom line in our industry is that we must adapt to the ever changing needs
and desires of our customers. The trend among our customers is to hold smaller
inventories of components such as hard drives. This forces us to maintain a base
stock of product in locations adjacent to our customers' manufacturing
facilities and also complicates management of our inventory.
Some of our customers are considering or have already implemented a "channel
assembly" model in which the customer ships a minimal computer system to a
dealer or other assembler. We then ship parts directly to the assembler for
installation at its location. This exposes us to risk of inventory mismanagement
by both the customer and the assembler. Furthermore, if the assemblers are not
properly trained in manufacturing processes, it could increase the number of
product returns resulting from damage during assembly or improper installation.
The channel assembly model requires proper alignment between the customer and us
and requires us to retain more of our product in inventory. We are therefore
exposed to increased risk of inventory obsolescence.
Dependence on Suppliers of Components
We depend on qualified suppliers for components. We qualify suppliers much as
customers qualify us, and it is an arduous process. A number of the components
used by us are available from a single or limited number of outside suppliers.
If a component is in short supply or a supplier fails to qualify a component, we
may experience delays or increased costs in obtaining that component. To reduce
this risk, we attempt to provide significant lead times when buying these
components. We may have to pay significant cancellation charges to suppliers if
we cancel orders, whether because of market oversupply or transition to new
products or
15
16
technologies. This occurred in 1998 when we accelerated our transition to MR
recording head technology. Because we manufacture fewer of our components than
our competitors, an extended shortage of required components or the failure of
key suppliers to remain in business, adjust to market conditions, or to meet our
quality, yield or production requirements could harm us more severely than our
competitors.
Limitations on Protection and Use of Intellectual Property
The hard drive industry has been characterized by significant litigation,
including, but not limited to, litigation relating to patent and other
intellectual property rights as well as products liability claims. From time to
time, we receive notices of alleged patent infringement or notice of patents
from patent holders. If we receive a valid claim of infringement we may be
required to obtain a license or cross license from the patent holder or we may
have to modify our existing technology or design new non-infringing technology.
Either of these solutions can increase our costs and harm our operating results.
We may also be liable for any past infringement. We are currently evaluating
several such notices of infringement. One of them involves a company called
Papst Licensing, which is asserting claims relating to several motor patents. In
1994 Papst Licensing brought suit against us in federal court in California
alleging infringement by us of five of these motor patents. The patents relate
to disk drive motors that we purchase from motor vendors. Later that year Papst
dismissed its case without prejudice, but it has notified us that it intends to
reinstate the suit if we do not agree to enter into a license agreement with
Papst. Papst has also put us on notice with respect to several additional
patents. Although we do not believe that the outcome of this matter will
materially harm our operating results, loss of any intellectual property
litigation could force us to pay a large amount of money and/or prohibit us from
manufacturing some products. In addition, the costs of defending such litigation
may be high, regardless of the outcome.
Our success depends in significant part on the proprietary nature of our
technology. Our patents may not provide us with meaningful advantages and may be
challenged. In addition to patent protection of certain intellectual property
rights, we consider elements of our product designs and processes to be
proprietary and confidential. We also believe that our non-patentable
intellectual property, particularly some of our process technology, is an
important factor in our success. We rely upon employee, consultant and vendor
non-disclosure agreements and a system of internal safeguards to protect our
proprietary information. Despite these safeguards, to the extent that a
competitor is able to reproduce or otherwise capitalize on our technology, it
may be difficult, expensive or impossible for us to obtain necessary legal
protection. Also, the laws of some foreign countries may not protect our
intellectual property to the same extent as do the laws of the United States.
Estimates May be Changed or May be Different than Actual Results
We have made and continue to make a number of estimates and assumptions relating
to the reporting of assets and liabilities. These estimates include, but are not
limited to:
o accruals for warranty against product defects
o price adjustment reserves on products sold to resellers
and distributors
o reserves for excess, obsolete and slow moving inventories
o reserves for accounts receivable
o estimates of product returns
The rapidly changing market conditions in the hard drive industry make it
difficult to estimate such accruals, and reserves and actual results may differ
significantly from our estimates and assumptions.
Fluctuations in Quarterly Results
We typically book and ship a high percentage of our total quarterly sales in the
third month of the quarter, which makes it difficult to match our product build
plans to customer demand for that quarter. If we do not forecast
16
17
total quarterly demand accurately, it can have a material adverse effect on our
quarterly results. Also, our operating results have been, and may in the future
be, subject to significant quarterly fluctuations as a result of a number of
other factors including:
o the timing of orders from and shipment of products to major customers
o our product mix
o changes in the prices of our products
o manufacturing delays or interruptions
o acceptance by customers of competing products in lieu of our products
o variations in the cost of components for our products
o limited access to components that we obtain from a single or a limited
number of suppliers
o competition and consolidation in the data storage industry
o seasonal and other fluctuations in demand for computers
o general economic conditions.
Potential Harm from Changing Market Demands
Over the past two years the consumer market for desktop computers has shifted
significantly towards lower priced systems, especially those systems priced
below $1,000. These computers typically have hard drives with lower capacity and
performance than those which we produce. We currently participate in this market
only to a limited extent. If the market for those lower price systems continues
to grow and we do not develop lower cost hard drives that can successfully
compete in this market, our market share could continue to fall.
The market for hard drives is becoming more complex and fragmented. As
broadcasting and communications are increasingly digitized, industry analysts
expect that the technology of computers and consumer electronics and
communication devices will converge, and hard drives will be found in many
consumer products other than computers. We have recently entered into an
agreement with Sony Corporation to develop a new hard drive for consumer audio
and video applications. Some of our competitors have announced the development
of similar products. It is much too early to assess the impact, if any, of these
new developments or forecast any future market demands.
Foreign Manufacturing Risks
Our products are currently manufactured in Singapore and Malaysia. We are
subject to some risks associated with foreign manufacturing, including, but not
limited to:
o obtaining requisite United States and foreign governmental
permits and approvals
o currency exchange rate fluctuations or restrictions
o political instability and civil unrest
o transportation delays or higher freight rates
o labor problems
o trade restrictions or higher tariffs
o exchange, currency and tax controls and reallocations
o loss or non-renewal of favorable tax treatment under agreements
or treaties with foreign tax authorities
We attempt to manage the impact of foreign currency exchange rate changes by,
among other things, entering into short-term, forward exchange contracts.
However, those contracts do not cover our full exposure and can be canceled by
the issuer if currency controls are put in place, as recently occurred in
Malaysia.
17
18
Possible Price Volatility of Common Stock
The market price of our common stock has been, and may continue to be, extremely
volatile. Factors such as the following may significantly affect the market
price of our common stock:
o actual or anticipated fluctuations in our operating results
o announcements of technological innovations by us or our
competitors
o new products introduced by us or our competitors
o periods of severe pricing pressures
o developments with respect to patents or proprietary rights
o conditions and trends in the hard drive industry
o changes in financial estimates by securities analysts
In addition, the stock market in recent months has experienced extreme price and
volume fluctuations that have particularly affected the stock price of many high
technology companies. These fluctuations are often unrelated to the operating
performance of the companies.
Securities class action lawsuits are often brought against companies after
periods of volatility in the market price of their securities. A number of such
suits have been filed against us in the past, and any of these litigation
matters could result in substantial costs and a diversion of resources and
management's attention.
Inability to Meet Future Capital Needs
In order to remain competitive, we will need to maintain adequate financial
resources for capital expenditures, working capital and research and
development. If we decide to increase or accelerate our capital expenditures or
research and development efforts, or if results of operations do not meet our
expectations, we could require additional debt or equity financing. However, we
cannot insure that additional financing will be available to us or available on
favorable terms. An equity financing could also be dilutive to our existing
stockholders.
Anti-Takeover Features
Our certificate of incorporation and bylaws contain provisions that could have
the effect of deterring or preventing some takeover attempts. We have also
adopted a shareholders rights plan that may have a similar effect.
Year 2000 Issue
The Year 2000 issue is the result of computer programs, microprocessors, and
embedded date reliant systems using two digits rather than four to define the
applicable year. We consider a product to be "Year 2000 compliant" if the
product's performance and functionality are unaffected by processing of dates
prior to, during and after the Year 2000, but only if all products (for example
hardware, software and firmware) used with the product properly exchange
accurate date data with it. We believe our hard drive products are Year 2000
compliant, although some older, non-hard drive products previously sold by us
may not be Year 2000 compliant. Litigation may be brought against makers of all
component products of systems that are not Year 2000 compliant. Our agreements
with customers typically contain provisions designed to limit our liability for
such claims. These provisions may not provide protection from liability,
however, because of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Any such claims, with or without
merit, could materially harm our business.
We have committed people and resources to resolve potential Year 2000 issues,
both internally and externally (with respect to our suppliers and customers) for
both information technology assets and non-information
18
19
technology assets. We are identifying Year 2000 dependencies in our systems,
equipment and processes and we are implementing changes to such systems,
updating or replacing such equipment, and modifying such processes to make them
Year 2000 compliant. Each of our business sites has identified critical systems
for which contingency plans are being developed in the event of any disruption
caused by Year 2000 problems. Testing of our primary business transaction
application has been completed and all remaining testing is scheduled for
completion by the end of July 1999.
We are vulnerable to the failure of any of our key suppliers to remedy their
Year 2000 issues. Such failure could delay shipment of essential components and
disrupt or even halt our manufacturing operations. While all suppliers are being
notified of our Year 2000 compliance requirements, we have established specific
reviews with our critical suppliers, and they are requested to report their
progress to us on a quarterly basis. We regularly monitor this progress and are
actively involved with a few suppliers which are behind schedule.
We are also communicating with our large customers to determine the extent to
which we are vulnerable to their failure to remedy their own Year 2000 issues.
We also rely, both domestically and internationally, upon governmental agencies,
utility companies, telecommunication service companies and other service
providers outside of our control. We cannot insure that these third parties will
not suffer business disruption caused by a Year 2000 issue, which, in turn,
could materially harm our business.
We anticipate that our systems, equipment and processes will be substantially
Year 2000 compliant by the end of July 1999. Expenditures related to our Year
2000 project, which includes normal replacement of existing capital assets, were
approximately $7.5 million through December 1998 and are expected to amount to
approximately $35.0 million in total. Based on work to date, we believe that the
Year 2000 issue will not pose significant operational problems for us. However,
if we don't complete our remediation efforts on time, or if we fail to identify
all Year 2000 dependencies in our systems, equipment or processes or those of
our suppliers, customers or other organizations on which we rely, it could have
material adverse consequences for our business, including delays in the
manufacture or delivery of our products. As a result, we are developing
contingency plans in the event such problems arise. We expect to complete the
development of our contingency plans by the end of September, 1999.
19
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Although the majority of the Company's transactions are in U.S. Dollars, some
transactions are based in various foreign currencies. The Company purchases
short-term, forward exchange contracts to hedge the impact of foreign currency
fluctuations on certain underlying assets, liabilities and commitments for
operating expenses denominated in foreign currencies. The purpose of entering
into these hedge transactions is to minimize the impact of foreign currency
fluctuations on the results of operations. A majority of the increases or
decreases in the Company's local currency operating expenses are offset by gains
and losses on the hedges. The contracts have maturity dates that do not exceed
twelve months. The unrealized gains and losses on these contracts are deferred
and recognized in the results of operations in the period in which the hedged
transaction is consummated. The Company does not purchase short-term forward
exchange contracts for trading purposes.
Historically, the Company has focused on hedging its foreign currency risk
related to the Singapore Dollar and the Malaysian Ringgit. With the
establishment of currency controls and the prohibition of purchases or sales of
the Malaysian Ringgit by offshore companies, the Company has discontinued
hedging its Malaysian Ringgit currency risk. Future hedging of this currency
will depend on currency conditions in Malaysia.
As of December 26, 1998, the Company had outstanding the following purchased
foreign currency forward contracts (in millions, except average contract rate):
DEC. 26, 1998
------------------------------------
CONTRACT WEIGHTED UNREALIZED
AMOUNT AVERAGE LOSS*
-------- CONTRACT RATE ----------
-------------
(U.S. DOLLAR EQUIVALENT AMOUNTS)
Foreign currency forward contracts:
Singapore Dollar............................ $80.9 1.6694 $0.5
===== ====
- ------------
* The unrealized losses on these contracts are deferred and recognized in the
results of operations in the period in which the hedged transactions are
consummated, at which time the losses are offset by the decreased U.S. Dollar
value of the local currency operating expenses.
DISCLOSURE ABOUT OTHER MARKET RISKS
At December 26, 1998, the market value of the Company's 5.25% zero coupon
convertible subordinated debentures due in 2018 was approximately $410 million,
compared to the related carrying value of $481.5 million. The convertible
debentures will be repurchased by the Company, at the option of the holder, as
of February 18, 2003, February 18, 2008, or February 18, 2013, or if there is a
Fundamental Change (as defined in the Debenture documents), at the issue price
plus accrued original issue discount to the date of redemption.
20
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was sued by Amstrad PLC ("Amstrad") in December 1992 in Orange
County Superior Court. The complaint alleges that hard drives supplied by the
Company in calendar 1988 and 1989 were defective and caused damages to Amstrad
of $186.0 million in out-of-pocket expenses, lost profits, injury to Amstrad's
reputation and loss of goodwill. The Company filed a counterclaim for $3.0
million in actual damages in addition to exemplary damages in an unspecified
amount. Trial of this case commenced October 5, 1998, and on January 5, 1999,
with the jury deadlocked on the issue of liability, a mistrial was declared.
Retrial of the case is set for March 1, 1999. The Company believes that it has
meritorious defenses to Amstrad's claims and is vigorously defending itself
against the Amstrad claims and pressing its claims against Amstrad in this
action. Although the Company believes that the final disposition of this matter
will not have an adverse effect on the Company's financial condition or
operating results, if Amstrad were to prevail on its claims, a judgment for a
material amount could be awarded against the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 5, 1998. The
shareholders elected the following eight directors to hold office until the next
annual meeting and until their successors are elected and qualified:
Number of Votes
---------------
For Withheld
--- --------
James A. Abrahamson ........... 81,737,139 1,556,300
Peter D. Behrendt ............. 81,742,961 1,550,478
I. M. Booth ................... 81,740,158 1,553,281
Irwin Federman ................ 81,745,359 1,548,080
Charles A. Haggerty ........... 81,742,444 1,551,995
Andre R. Horn ................. 81,749,005 1,544,434
Anne O. Krueger ............... 81,739,485 1,553,954
Thomas E. Pardun .............. 81,752,685 1,540,754
In addition, the shareholders approved the following proposals:
Number of Votes
---------------
For Against*
--- --------
1. To approve the amendment to the Company's
Employee Stock Option Plan authorizing an
additional 10,000,000 shares. 38,257,800 9,990,509
2. To ratify the selection of KPMG LLP
as independent accountants for the Company
for the fiscal year ended July 3, 1999. 82,263,317 1,030,122
* includes abstentions
21
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1.1 Rights Agreement dated as of October 15, 1998 between Western
Digital Corporation and American Stock Transfer and Trust
Company, as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate to be distributed to holders of
Rights after the Distribution Date (as that term is defined in
the Rights Agreement) (1)
10.1.4 Western Digital Corporation Amended and Restated Employee Stock
Option Plan as amended on November 5, 1998 * **
10.38 Revolving Credit and Term Loan Agreement, dated as of
November 4, 1998 among Western Digital Corporation, BankBoston
N.A. and other lending institutions listed therein *
27 Financial Data Schedule
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(1) Incorporated by reference to the Company's Form 8A (No. 001-08703) as filed
with the Securities and Exchange Commission on November 19, 1998
(b) REPORTS ON FORM 8-K:
On October 26, 1998, the Company filed a current report on Form 8-K to
file its press release dated October 19, 1998 announcing its first
quarter results. On November 19, 1998, the Company filed a current
report on Form 8-K to file its recently adopted stockholders rights
plan, which replaced its existing stockholders rights plan which
expired in November 1998. On January 19, 1999, the Company filed a
current report on Form 8-K to file its press release dated January 19,
1999 announcing its second quarter results.
22
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN DIGITAL CORPORATION
----------------------------
Registrant
/s/Duston Williams
----------------------------
Duston M. Williams
Senior Vice President
and Chief Financial Officer
Date: February 8, 1999
23
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1.1 Rights Agreement dated as of October 15, 1998 between Western
Digital Corporation and American Stock Transfer and Trust
Company, as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate to be distributed to holders of
Rights after the Distribution Date (as that term is defined in
the Rights Agreement) (1)
10.1.4 Western Digital Corporation Amended and Restated Employee Stock
Option Plan as amended on November 5, 1998 * **
10.38 Revolving Credit and Term Loan Agreement, dated as of
November 4, 1998 among Western Digital Corporation, BankBoston
N.A. and other lending institutions listed therein *
27 Financial Data Schedule
* New exhibit filed with this Report.
** Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(1) Incorporated by reference to the Company's Form 8A (No. 001-08703) as filed
with the Securities and Exchange Commission on November 19, 1998